280: How To Prepare Your Business For Sale And What Multiples To Expect With Thomas Smale

280: How To Prepare Your Business For Sale And What Multiples To Expect

Today, I’m thrilled to have my friend Thomas Smale on the show. Thomas is the founder of FEInternational, one of the largest and most prolific website business brokers on the internet.

Thomas has completed hundreds of millions in SaaS, ECommerce and content business acquisitions since 2010 and he’s got a huge network of pre-qualified investors.

In this episode, we break down what multiples businesses are selling for today and how to prepare your business for sale.

What You’ll Learn

  • How Thomas founded FEInternational
  • Why and how Thomas got into the business of buying and selling businesses
  • The online business models that carry the largest multiples
  • How to prepare your business for sale
  • The criteria to look for when buying a business

Other Resources And Books

Sponsors

Klaviyo.com – Klaviyo is the email marketing platform that I personally use for my ecommerce store. Created specifically for ecommerce, it is the best email marketing provider that I’ve used to date. Click here and try Klaviyo for FREE.
Klaviyo

Privy.com – Privy is my tool of choice when it comes to gathering email subscribers for my ecommerce store. They offer easy to use email capture, exit intent, and website targeting tools that turn more visitors into email subscribers and buyers. With both free and paid versions, Privy fits into any budget. Click here and get 15% OFF towards your account.
Privy

EmergeCounsel.com – EmergeCounsel is the service I use for trademarks and to get advice on any issue related to intellectual property protection. Click here and get $100 OFF by mentioning the My Wife Quit Her Job podcast.
Emerge Counsel

SellersSummit.com – The ultimate ecommerce learning conference! Unlike other events that focus on inspirational stories and high level BS, the Sellers Summit is a curriculum based conference where you will leave with practical and actionable strategies specifically for an ecommerce business. Click here and get your ticket now before it sells out.

Sellers Summit

Transcript

Steve: You’re listening to the My Wife Quit Her Job Podcast, the place where I bring on successful bootstrapped business owners and delve deeply into the strategies they use to grow their businesses. Now today, I have my friend Thomas Smale on the show and Thomas is the founder of Fe International one of the leading business brokers in the world. And in this episode we are going to break down what multiples businesses are selling for today and how to prepare your business for sale.

But before we begin I want to give a quick shout-out to Privy who’s a sponsor of the show. Privy is a tool that I use to build my email list for both my blog and my online store and right now I’m using Privy Display a cool Wheel of Fortune pop-up basically user gives your email for a chance to win valuable prizes in our store and customers love the gamification aspect of this and when implemented this form email signups increased by a hundred thirty one percent. Now, you can also use Privy to reduce car abandoned with cart saver pop-ups and abandoned cart email sequences as well one super low price that is much cheaper than using a full-blown email marketing solution. So bottom line Privy allows me to turn visitors into email subscribers and recover lost sales so head on over to privy.com/steve and try it for free if you decide you need to the more advanced features use coupon code MWQHJ for fifteen percent off once again that’s privy.com/steve.

I also want to give a shout out to Klaviyo for sponsoring this episode. Code Black Friday is right around the corner and for my e-commerce store email marketing is a heavy part of my holiday sales strategy. And in fact last year, it was close to 50% of My overall sales. And of course as you all know klaviyo is the email marketing tool that I use for Bumblebee Linens now Klaviyo is the growth marketing platform chosen by over 20,000 Brands generating more than three point seven billion dollars in Revenue in just the last year and with the holiday season right around the corner klaviyo has created the ultimate planning guide for crushing those holiday Revenue targets for marketing creative to segmentation strategy. These are proven tactics for more personalized marketing, especially in time for the holiday season. To get ahold of this guide, visit Klaviyo.com/mywife. Once again, Klaviyo.com/mywife. Now on to the show.

Intro: Welcome to the My Wife Quit Her Job Podcast we will teach you how to create a business that suits your lifestyle so can spend more time with your family focus on doing the things that you love. Here’s your host Steve Chou.

Steve: Welcome to the My Wife Quit Her Job Podcast. Today, I’m really excited to have Thomas Smale on the show. Now Thomas is someone who I’ve known for quite some time now and he’s actually sponsored the seller Summit for the past four years. He is the founder of Fe International one of the largest and most prolific website business brokers on the internet and they’ve completed hundreds of millions in sas Commerce and content business Acquisitions since 2010 and they’ve got a huge network of pre-qualified investors. And today what we’re going to do is we are going to talk about Takes to sell a business and which business types have the biggest multiples today. And with that welcome to show Thomas. How you doing today, man?

Thomas: Yeah. Thanks. Steve, I’m really good.

Steve: Hey Thomas. So for the people who don’t know who you are. What is your background story? And when did you kind of get into this business of buying and selling online businesses?

Thomas: Yes. So if you gave up to 2010 when I founded the company, I was still at College, I think like many college students. I was trying to make some extra cash. So I got into I met someone who’s buying and selling domains. I started doing that as well and to others did not do very well until why I realize is that what I thought was a domestic really have any intrinsic value to have any consistent process selling them. I thought like more luck than anything else. So I then stumbled upon the idea of websites. And at the time I was studying I see a business degree at University or college. So that made a lot more sense to me resonated so I didn’t really have any money so there’s a case of Investing $100 usual my credit card at the beginning of month buying a website finding ways to improve it. So she’s just finding ways to make a little bit of extra money with it.

And then reselling it before the end of the month paying off my credit card and redoing that cycle so that quite successfully for a while and was making less nice little bit of extra side income. So in the year I graduated with his 2010. I decided to write a book and a course about how to buy and sell. That’s kind of profit. So I wrote that launch that at the time I thought that I would or if that’s what I thought the business or F in SAS as it is now, I thought it was going to be a business where I made all of my money teaching people how to buy and sell and also buying selling myself. What happened is that the course did well it got it was successful is very popular. People who bought the course it turned out. They actually didn’t want to sell businesses themselves. They wanted to hire someone to do it for them. So I started having people coming to me with established businesses.

They had already either bought or built themselves and saying well, hey, you know how to buy and sell something for a $1,000. What about if you help me sell my business for twenty thousand. So the first day I ever did as a broker so to speak the $20,000 deal didn’t get paid anything into it. It’s sold and then from that really just compounded from Word of Mouth what we do now didn’t really exist back then. I was one of the only people only companies helping people with online businesses seldom the water like business brokerage been around for many many years. So if you have a restaurant or bar those kind of businesses have been bought and sold for Long Time online businesses lesser. So that’s how I started out and then it really just compounding from there as a lot of Word of Mouth.

Steve: Yeah

Thomas: It started. A doubling down and focusing something like many businesses. It was a very early pivot what we do now is not what we did at the start but the concept of buying selling is still really the same. It’s just now we do much bigger deals than what we started out.

Steve: So just for the benefit of the listeners out there. What Thomas did is actually a pretty good way to get Legion you put out some education about a particular topic and people might not be necessarily interested in the education. They want to just hire you out right? So I guess you kind of accidentally stumbled upon that and that’s really allowed your business to kind of get jump-started through that method.

Thomas: Yeah. I think that’s a pretty good way of describing it.

Steve: So Thomas, I think I’ve seen you at every single event that I’ve ever been to does Fe kind of specialize in certain types of companies or do you kind of just do them all?

Thomas: The same many as you can used to be that if it’s an online business, we would we would take it on and try and sell it as years have gone by we’ve become a little bit more focused and specialized in what we do and that’s partly because we’re a success The only business we only get paid if we sell the company and we don’t want to waste anyone’s time if we’re not going to be of any help or assistance. So we primarily focus on e-commerce and within e-commerce that includes Amazon FBA examples of merch all sorts of different businesses within that. We also do SAS and software companies and then content based businesses, which we would usually seems like blocks that monetize with affiliate programs or advertising then occasion. We have some other businesses in so we quite often cell service businesses, which also have a kind of subscription or or product element as well for usually those those three main business models of SAS Ecommerce content are what we specialize in the most.

Steve: So I’m just curious myself what business models what online business models carry the largest multiples right now on average?

Thomas: So if you look across those three business models SAS is generally the highest. I mean, there’s hundreds of factors that go into

Steve: I’m sure there are.

Thomas: Valuation. Yeah, so the reason I guess I’m high level. The reason why SAS valuations are generally higher than e-commerce in content is the fact you almost always have recurring Revenue. So if you have a e-commerce business, for example that has recurring Revenue. So let’s say a subscription box or maybe you have like a membership or or something like that or subscribe and save that kind of business model. Then you would expect to see a similar valuation to her SAS business, but they do tend to be the highest. Because of the fact you’ve got that recurring Revenue.

Steve: Can you just give us an idea of like the low and high end over multiple for I know it’s hard to generalize here, but I’m just trying to get an idea in comparison.

Thomas: Yes. So, the e-commerce businesses. We’ve seen recently anywhere in the two to four times. Net income range SAS businesses three times to 4.7 five times and then we’ve had some local on much higher than that lower than that, but that’s a fair average range so that’s really the top range of e-commerce is a middle range of SAS if you want to look at it that way.

Steve: And what about content sites? Like blogs?

Thomas: Yeah content in the 2.25 to 3.25 range the slightly.

Steve: Interesting. So, it’s a lot?

Thomas: Yeah slightly tighter range than e-commerce. I’d say that’s generally because in e-commerce you’re selling usually well more valuable businesses. You’re selling an actual product. I think feels like it has a lot of value to buyers and investors. Whereas for the content business, you’re usually not selling anything. You are, I mean by definition just the value is in the content. You’ve created some multiples do tend to be a little bit lower. But we have seen some go much higher I mean; we completed a 12 million-dollar deal a couple of weeks ago and that multiple was much higher than anything. I’ve quoted there that does depend a little bit on the business that size of it and the business model itself.

Steve: So, going through each one of those business models what allows it to have a higher multiple. So, like in the let’s do e-commerce since the majority of the listeners are on the e-commerce space. What would cause an e-commerce… You mentioned subscription models, but outside of that, what would cause an e-commerce store to have a much higher multiple in general?

Thomas: Yes. One thing with e-commerce and say that comes up a lot which really does affect the multiple is the growth rate. One thing we see in e-commerce more than any other business model is businesses that grow a lot and then decline particularly businesses on Amazon; It’s quite difficult. At least from what I’ve observed to consistently grow a business on the Amazon platform. That doesn’t mean you don’t have a profitable business, but it might mean one year you do a million in sales. Next you do 950 then you do 1.2 million. The margin center fluctuates as well.

Steve: Hmm.

Thomas: So if you have an e-commerce business, which is consistently growing top Line and bottom line so revenue and profit then those multiples are going much higher than a business which is which is not live reasonably uncommon to see one that’s growing top and bottom line just because in e-commerce unlike a Content or SAS business, it’s much more likely to have margins that fluctuate if the platform fees go up or fulfillment fees go up or the cost of your product goes up or even down if it goes down then your multiples going to increase as your net margin creases.

Steve: And so, when you’re looking at that for an e-commerce business, are you looking at top and bottom line increase for an existing product? Because a lot of times people on Amazon the way they grow as a just start releasing new products.

Thomas: Yes. I mean that is a good point. So, another kind of value driver is the number of skis you have orb-like for that lines. So, if you just have one product line, then the multiple in general is going to be lower if we have multiple then it’s generally going to be higher. The way they look at it. If you’re constantly launching new products to keep the net profit high is how sustainable and how easy is it to take over that? But like business model. So if it’s, I don’t know, you’re selling Steve products and every product you sell as a new product with your face on it that’s going to be a little bit harder for someone who buys your business take over.

Steve: I don’t think anyone would buy that product in the first place. But, go on yeah.

Thomas: Well…

Steve: Hahaha

Thomas: But if they were that would be quite difficult for someone to take over. So if you have a really good process for launching new products on a consistent basis, then buyers would be happy of that. If you do not and you’re somewhat reliant on maybe you’re a designer or a product developer or you are the one who is, I guess somewhat unique to your launch strategy, then that’s going to be a little bit harder to sell.

So, it does we I guess the short of it is we look at lots of different factors and variables and buyers really looking at ultimately do they think the business will continue to perform at its current level or better after they required the business. If so, they’re going to pay a higher multiple. If not, they going to pay a lower multiple or not buy the business at all.

Steve: Can we talk a little bit about an Amazon e-commerce business versus one like where you own your own website and you have email subscribers and that sort of thing.

Thomas: Yeah say from a multiple perspective and I mean, just because it’s Amazon or just because it’s your own website doesn’t change the multiple detectors at all to say.

Steve: Oh okay.

Thomas: But there are things we would then look at to establish the value. So, for example, a lot of people who on their own stores that sets on Shopify they might get all of their traffic from running Facebook ads. That’s definitely been a more common level. We’ve seen in the last few years that tends to rely on what the effectiveness of the Facebook campaign itself or the campaign’s you’re running and usually the skill of the operator. So, the person who’s running the ads maybe you’re using an agency most businesses. We see a people doing themselves those businesses are going to be generally difficult to sell or attract smaller multiples because they’re relying on that one source traffic. Now, if you’ve got that second type of business you mentioned which is an email list man. You have maybe had a business where you launch a new product every month and the majority people that buy that product from your existing email list that’s going to be a significantly more valuable business. So back to what was done earlier. It’s not quite recurring revenue and such. But if you have the Same people buying on a consistent basis then from a buy perspective. That’s basically the same as recurring revenue. So, this is like that is going to be quite valuable. And then in the Amazon space, the great thing about the Amazon platform. This is how big it is and how many potential customers you can reach probably the worst thing about it is you never really truly own the…

Steve: Right.

Thomas: Customer so you can email them and say hey, I’ve just launched a new product. At least, It’s very difficult to do that and stay compliant with their kind of rules.

Steve: So, it’s going to say that at least for our business about 36% of it is repeat business and it seems like in Amazon, there’s no guarantee for that. So, would you say in general like an e-commerce store that you own with a list is generally going to sell for higher multiples than just an Amazon business that sells equivalent products.

Thomas: Say generally speaking. Yes, particularly, if you have that email list and particularly if you can prove that actual bias and that’s the important bit because a lot of people build an email list then say, “Hey, I’ve got 10,000 emails” and its people that signed up to I don’t know say, e-book. I like a free book as a lead magnet but they’ve never actually bought a product that’s not as valuable as say a thousand people the much smaller list of which all of those are past customers and you segmented it’s you know, each of them are spent at least $100 or $1,000 or over or whatever it might be.

Steve: Like if I showed you my Klaviyo account for example, and I separated It out the people who have bought multiple times and have a high lifetime value there be a lot more valuable.

Thomas: Precisely and I say a lot of people I mean, it’s probably just a really good lesson to everyone. A lot of people don’t have that set up of tool. So the fact you even have that setup and you probably think about it on a day to day or week by week basis puts you ahead of a lot of e-commerce business owners who may have an email list, but if they have it, there’s no level of very rarely any level of thought in it beyond, “Hey, when we launched a new product, we’ll email people”. Well, they might have a newsletter. So, your sounds like you’re a step ahead or two steps ahead.

Steve: So it sounds like then when you’re saying that an Amazon business will roughly self the same multiple as an e-commerce business, you’re referring to those e-commerce businesses that just primarily rely on other platforms to get their traffic and sales like Facebook ads for example or Google ads and those will tend not to or self-work with the multiples as an Amazon business because really you’re just relying on a different platform right?

Thomas: Generally, yes. I mean, that’s exactly the way to look at it and the reason, the business with emails were so high is because you’ve got that reliable income stream from repeat customers.

Steve: So, what are some other factors that increase the valuation? Do patents are those, are those a big deal?

Thomas: Not really to be perfectly honest. To say, I mean, we do sell businesses that have patents people do care about things like trademarks. I’d say people care more about the fact “Is it a unique product?” but because you have a patent doesn’t mean the product itself is good, but anyone can get a patent does it mean anyone actually wants to buy the product itself. So, say generally speaking. If you do have a unique product or unique products and the buyers are going to look at how defensible that is. So, do you have like a unique deal or like an exclusive deal with the supplier? Do you have brand protection? So that might be a patent that might be a trademark lots of different ways you can protect it and in that respect. So, buyer will look at those kinds of things, but I say in general, having a patent versus not having a patent doesn’t increase or decrease the value of such. People really care about is the product unique if it’s not and you’re reseller, that’s not necessarily a bad thing in general those businesses are going to sell for less just because a margins tend to be a little bit lower.

It’s not just the fact that you’re a reseller which the problem that the margin center be lower. They tend to fluctuate more regularly because you’re more like to have competition that comes up. If you’re selling some more like Amazon or Facebook, for example, then you’re much more likely to fluctuate because there’ll be new competitors all the time. If you have your own email list, then it could be completely different because that email list might not care that you’re reselling a product that they could buy elsewhere because they’re not looking elsewhere there on your list looking to buy what you’re selling. So, this is kind of my point. There are so many different factors that go into it.

Steve: Yeah.

Thomas: I guess the Wade our valuation. One process works is it’s not like you start at Baseline multiple and then add 10% or take away 10% Depending on checking boxes. It’s a combination of the factors that is important.

Steve: Sure, what I’m trying to get out actually is what you might want to focus on if you were to just plan ahead for evaluation. Like what about social media? Like if you have a big Facebook group that’s active. I mean or an Instagram account, how do all those factors factor into the valuation as well?

Thomas: So, any sort of active market you have of your either existing or potential customers. So that’s the email list or social media following is important and by his death. He like to see that from a brand perspective. But again, that the most important thing is proving that having those people is actually beneficial to the business ideally in the form of sales. They can prove that they’re buying or in the form of interaction. So, if for example, in my business the way we look at the we have might have a lot of people who follow us on social media who aren’t necessarily customers or potential customers, but they might like our content share or content with people who could be a potential customer. So, doesn’t mean they’re worth nothing.

So, from that perspective a buyer will care about the type of engagement you have. To buyers engaging, that’s great. If it’s just a guess like fans or super fans that’s good as well. And then also how you’ve built that following. I think I’ve seen it less in recent years. But if you go back over the years, it was very prevalent people building up kind of fake fans and viewers see would regularly see Facebook fan pages with a million fans. And then that the average post would get 3 likes. So, there’s definitely a more of an emphasis now buyers are getting more intelligent and they realize that it’s the interaction that’s important. Not just the number of fans or the number of followers you have so that again it’s not like you get 10 cents per follower as your evaluation. It’s really just how are they interacting? Are they buying if they are your perfect target audience and they’re not buying what does that tell you about the business? That might be a hard to catch in the evaluation, but from the way I want to buy this business or not? They’re the kind of things they might think about.

Steve: If you sell an Amazon or run any online business for that matter, you’re going to need a trademark to protect your intellectual property. Not only that but a trademark is absolutely necessary to register your brand on Amazon. Now, I used to think that any old trademark registration service would work and that could even try to register my own trademark by myself on the cheap, but I was dead wrong. Securing a trademark without a strategy in place usually results in either an outright rejection or a worthless unenforceable trademark. Now, that is why I work with Stephen Wagner and his team from Emerge counsel. They have a package service called total TM, which provides the same attention to detail and process that large law firms do at a fraction of the price. Now for me personally, I like Emerge Council because of their philosophy, their goal is to maximize IP protection while minimizing the price. So, before you decide to register a trademark by yourself or file for other IP protection such as a copyright or a patent, check out Emerge counsel first and get a free consult. For more information go to emergecouncil.com and click on the Amazon sellers’ button and tell Steve that Steve sent you to receive a $100 discount on the total TM package for Amazon sellers. Once again, that’s emergecounsel.com over at emergecounsel.com now back to the show.

Steve: I Imagine for something like Instagram. It’s really hard to attribute like a post to sales right because it’s hard to directly link from Instagram to a product. So, I to kind of put words in your mouth. I guess the higher traffic sources of the ones we can actually directly attribute it to a sale.

Thomas: Yeah over there is a reasonable degree of confidence. So yes, you’re right Instagram is difficult to track but if you have no Google analytics set up for example, and you know that I don’t every day at 12 p.m eastern. You post a new offer and you can see the traffic and sales spike of that time in Google analytics. Yes, you might not be able to prove its from exactly that post but it’s reasonable to assume that it was so it’s often very difficult win in any business to get an exact answer of what’s caused what but you can usually it’s our job to affect you build a story and say well.

Steve: Sure.

Thomas: We know that regular on Instagram. We know there’s a spike in sales at this time. Therefore, it’s fair to assume. It’s from Instagram or it might not even be from Instagram. It might be that the Instagram post prompts you to tell a friend about them. It might be that the Instagram post prompts you to Google them. It might be that the Instagram post pumps you to read your e-mails and see if they sent you an offer that week. So, try to look at them individually is difficult you really have to look at its kind of all together and how they co-relate.

Steve: So, it seems to me then that out of all these traffic sources organic Google traffic for example might be the most valuable.

Thomas: Assuming it is sustainable. I would definitely say there’s a high degree of value on it. If you can prove it’s coming in consistently now much like Facebook ads and equal. No sorry, e-commerce like Amazon. It’s definitely still you’re still relying on Google that traffic can fluctuate get a penalty there all sorts different things that can happen to increase or decrease your traffic. So again, I mean another fact that comes into valuations how old to business is. If you’ve been getting traffic from Google for five years and that’s been increasing year-on-year then apply as much more likely to pay a higher multiple thinking that’s quite reliable if your traffic is… I know you’ve been getting traffic for two years and you’ve seen a bit of an increase in a bit of a decrease. Then that’s not really going to be worth as much sort of it depends on the predictability and age is an important factor of that. Generally speaking, has been around for longer, it’s more likely to continue at least in the eyes of buyer.

Steve: Sure. What about the revenue of the company? Like I’ve heard that higher revenue companies will have higher multiples than smaller companies, right? Can you just kind of talk about what the breakdowns are?

Thomas: Yeah, I’d say that’s a fair observation again. There’s no like, “Oh! As soon as you hit this level, you’ll suddenly worth X”. But there’s definitely a correlation between the size and the multiple, although at the lower end often multiples can still be quite high because there’s so much competition from buyers. So, if you have a $500,000 e-commerce business, there are a lot of buyers at that level looking to buy these businesses. You might end up achieving quite a high multiple just from the fact there’s so much demand in general. I think a reasonable rule of thumb would be once you go above 10 million revenue. The multiples will start to increase.

So that’s where you might start to see multiples above say four times. For example, we’re working on Amazon development that does around 15 million in revenue and if profitable and the multiple on that is can’t tell you the exact number but it’s above 4. So, multiples definitely do increase. But again, there are so many different factors that go into it just because you’re doing 10 million a year doesn’t necessarily mean it’s a good business and by goodness as I mean in terms of valuable from a buyer’s perspective and just because you’re doing say only a million dollars in revenue doesn’t necessarily mean it’s a bad business as such it would get a low multiple, but you are right. Generally speaking the larger the businesses revenue and profit wise but more it’s going to be worth but there are lots of things that go into that.

Steve: Let’s switch gears a little bit. Let’s say someone listening wants to sell their business. What are some steps that you should take to kind of prepare your company for sale?

Thomas: So, I think the most fundamental level the very best thing. I think you should do. It’s nothing really to do with your company itself. It’s you personally it’s figure out what you would like to achieve and that’s thing you need to establish its both personally and also so personally might mean with your husband with your wife with significant other whoever that might be in your personal life and then for business perspective, maybe have a business partner or business partners. Maybe you have investors. It’s very important to be on the same page with what you’re trying to achieve because if you want one thing and your spouse wants something completely different or you are one thing and your business partner want something completely different. Then even if your business is like let’s say it’s checking all the boxes high valuation ready to sell then nothing’s going to happen. You’re not going to have a successful process because there’s probably going to be one person blocking it.

So, once you have an idea of what you’re trying to achieve that’s probably the most important thing so know what you’re trying to achieve and then from there you can start establishing what that’s going to going to look like in terms of either timing or value. Most people from now will either established they want to make a certain amount of money. So, it might be a million dollars, 10 million dollars, 100 million dollars. Again, it doesn’t matter what that number is. You can’t tell them other number should be I can’t tell them that’s very much a personal decision with yes personal and professional stakeholders. So, once you’ve established that I always say that. And this is kind of might sound a bit too much your pitch, but I think the best thing to do from there is going to a free valuation

Steve: Sure.

Thomas: All lemonade firms and brokers will or any good ones at least will offer a free valuation and generally from our perspective, we’ll put together evaluation knowing that the vast majority of people are not ready to sell now. But it allows you to ascertain where you are in comparison to your goal. So, if you get evaluation today in your business is worth 5 million dollars and the number you have you want to sell for that you and your wife are going to be happy to sell for is 6 million dollars then probably in your business, you’re not going to have to do a huge number of things to get to that level. You probably just gonna have to run the business a little bit longer. Now, if you get a valuation today of 500,000 and you want to sell for 20 million, then it’s probably a lot of work you’re going to have to do to get there. So, from that perspective your plan and what needs to be done to increase the value does tie in a lot with where you like right now versus where you need to get to value-wise.

Steve: I guess specifically what I was getting at, there was, let’s say I just want to maximize my evaluation. Would I focus more on revenue growth or profit growth? Let’s say my time frame is like 2 years

Thomas: Yeah. So, say if you are any intention is to increase the value and it doesn’t matter what you’re trying to achieve then a combination of the two. What a lot of people do is they make the mistake of doing one and not the other so say, “Hey look like I tripled my Revenue” but their net worth is still the same what you might find is that you can increase your revenue and your margins will slightly decrease but you’re because you’re I don’t buy more traffic for example, but your net number as a dollar value or whatever currency are using is higher. That is fine. But don’t just increase revenue and not worry about bottom line at all. I have seen that a lot where people will particularly, it comes to buying traffic. They’ll buy traffic they’ll double their revenue, but they were actually increase their net at all. So, a combination of the two is important so if the two metrics you’re always going to be getting a multiple of your net when it comes to selling. So that’s the important number to worry about.

Steve: Earlier you mentioned like the growth rate matters also, right? So how do you kind of balance the two?

Thomas: If every day, it’s a tricky one. So, you have to be growing your revenue consistently because that proves there are people that want to buy your product people are real doing a product or products or whatever you might be selling. So that’s important. But at the same time, you need to prove that it’s profitable to do. So, there’s no point growing a business if it’s not going to become more profitable in the process but I think the important thing to think about is not doing anything that could affect the long-term of the business. So, what a lot of people do is they’ll focus on revenue growth because they’ll hear that revenue growth is an important part of evaluation and then they’re also hear that they’re going to get a multiple of net like we’re talking about. So, they’ll start to do things that may jeopardize the long-term future of the business but doesn’t necessarily affect the business short-term. So quite a common one is they’ll start cutting head count. So, I’ll be all we don’t actually need this support rep we don’t need to do we don’t need to publish any blog content anymore.

Steve: Right. Okay, I mean, it seems like growth contributes to the multiple. Whereas your profits, you know kind of contribute to that base right? For that multiplier?

Thomas: Exactly. Yes, but I mean in an Ideal world. For example, the double your revenue, the double your profit. I guess the reality of business and from what I’ve seen over the years. It’s very rarely that simple.

Steve: Yeah and nothing is ever black and white, but if I were to like double my revenue and then increase my net by like 5 or 10%, is that better than not increasing my revenue so much? Maybe 10 or 15% on revenue, but my profits have increased by 2x?

Thomas: Generally speaking, either of those scenarios is fine. Growth is always good. That’s a combination of the two is healthy, but as I’d say combination because no one wants to say a business. There’s no potential to improve it. So, if you’ve done absolutely everything to improve the net margins and there’s no way that can be improved then the business might be great, but that could be a difficult one to sell from a buyer’s perspective. So, I guess just look at them all together. Yes, ideally everything would increase together. But either works.

Steve: I just want to let you know that tickets for the 2020 Seller Summit are on sale over at sellersummit.com. Now what is seller Summit? It is the conference that I hold every year that is specifically targeting e-commerce entrepreneurs selling physical products online and unlike other events that focus on inspirational stories and high-level BS. Mine is a curriculum-based conference where you will leave with practical and actionable strategies specifically for an e-commerce business. And in fact, every speaker I invite is deep in the trenches of their e-commerce business entrepreneurs who are importing large quantities of physical goods and not some high-level guys who are overseeing their companies at 50,000 feet. The other thing I can assure you is that the Seller Summit will be small and intimate every year we cut off ticket sales at just a couple hundred people. So tickets will sell out fast, and in fact, we sell out every single year many months in advance now if you’re an e-commerce entrepreneur making over 250K or 1 million dollars per year, we are also offering an exclusive mastermind experience with other top sellers. Now, the Seller Summit is going to be held in Fort Lauderdale, Florida. From May 6 to May 8. And right now, we are almost sold out of Mastermind tickets already and I will be raising the ticket price regularly starting the day after Cyber Monday for more information, go to sellerssummit.com. Once again, that’s SELLERSUMMIT.COM or just Google it now back to the show.

Steve: How does the process work? And what is what is a brokerage charge for example?

Thomas: Yeah. So generally speaking, like said first thing with us is, yeah evaluation. Get a free evaluation. At that stage, you’re not committed to anything other than we just ask you to send the information we need to put together evaluation. Assuming you get the evaluation. Let’s say you want to get 5 million dollars in this business and we tell you it’s worth $500. Just keep it super simple right from there. We would sign an engagement agree with you then gave her an agreement would tell you what the fees are these very, it depends on size of business. Generally speaking, we are 15% on the first million dollars of value or sale price specifically and then that tears down beyond that. So, if you have a 20-million-dollar business, you’d expect to pay less than 15% together $500,000 business, its 15%.

Steve: Got it. Okay.

Thomas: But you don’t pay anything until the business sells or have sold and if it doesn’t sell you don’t pay anything. From there, we then go through a discovery process with you where vets we asked a bunch of questions about your business. So, use you will send you a questionnaire of about a hundred different questions will go through your financials. Effectively trying to learn as much about the business as we possibly can and any day to you have any information about your business, we will use I guess to the advantage of the sell. So, for example, like you mentioned earlier Klaviyo account, we might go through that and be able to prove some useful metrics. So, you might be to say well of the 10,000 subscribers on Steve’s email list. We know that 5,000 have bought at least three times and they spent at least $1,000. So those kinds of metrics are important we will get them out. The effect he then put together a sales document which we call a prospectus which is usually are 30- or 40-page document depending on the size and the complexity the business once we’ve put that together and that process generally takes a couple of weeks.

We spend a lot of time up front making sure we understand your business making sure we learn everything there is to learn about your business and making sure that we’re aware of the good things and also the bad things and we can kind of present that in a in a fair and honest way because no one wants to know buyers want to see a business where there are issues that have kind of been covered up because they’ll always get discovered at some point in the process. Our mentality is it’s better to be transparent up front versus hiding things and then being discovered a couple of months into the process. So, once we prepared that we then send that to you and say hey Steve got the sales materials ready read through it and make sure you’re happy you effectively sign off on our materials to make sure you’re happy with the factual accuracy.

We then go out to our investor Network in three stages. So, we start off by reaching out to a very segmented list of buyers will put together who we think will be specifically interested in your business based on what they’ve told us before. So, might be they said, “Hey, I really want to buy an e-commerce business that sells this type of product my budget is 2 – 10 million dollars. So, if you have a 5-million-dollar e-commerce business, we will send it to them”. So generally, we start with a relatively small group. So small percentage of our overall network, but they’re the ones who are most likely to buy so we send out to them. We also will simultaneously be depending on your business on what you think could be the ideal buyer. We’ll also reach out to potential strategic buyers. So, we’ll build a list of those we reach out to those at the same time from there. We then also go out to use your battle week later go out to our whole buy network which at the moment is about 41,000 active investors and they have over not given us any criteria or just have high level criteria.

So, we’ll send them. Very much like an overview of your business. They can then request information. If they request information, they have to sign a nondisclosure agreement. So, we don’t just send out Steve’s businesses sale to 41,000 people with your like domain and all the information all the financials. We have a vetting process. So, once your request information will then get confidentiality agreement ask other questions so that from there, there’s a back and forth negotiation with the different parties. So that’s something that we’ll do on your behalf. You’re paying us to negotiate the deal effectively. So, buyers will have asked questions. Some buyers will want to get on cools of you as a seller. So, we will navigate that process and will establish who we think is serious and who is not. Often, you’ll find there’s lots of people who are just curious and fishing for information.

They would love to have a chat with a successful business owner. So, they’re going to 10 they have money and trying out a cool. So, it’s our job to filter those people out and we do a good job of doing that. So, we want to make sure that your anyone on the phone with people who weren’t necessarily definitely going to buy a business but could buy a business if they like it and happy with it. So, from there, there’s a negotiation process. Hopefully we get multiple offers. So, for example on an eight-figure Amazon business with work on the moment, we had 11 of offers that came in and then from there we work to narrow that down so we’ll say okay. Well, we don’t like these 3 offers at all. We’re just gonna kick my process. We don’t like these for…

Steve: How are these deals typically structured and then what affects whether you like an offer or not? Is it because it’s financed, all cash or I mean, what are some factors in there?

Thomas: Yes, generally speaking in the e-commerce space you would expect an amount of cash upfront as to how much that is. It can really vary anywhere between say 50 and 80% of the deal value upfront and then usually a performance element beyond that awesome set financing. And then also you generallly going to get paid separately for your inventory at cost and then the amount of cash you get down upfront really does depend on a lot of the other factors we’ve spoken about so if you have a business, which is very reliant on a single channel, so let’s Amazon or Let’s say it’s Facebook ads or let says it’s single product. You would generally expect to get less shot less upfront and more of a performance element. If you have a much older business, which has been around for a long time has multiple channels, multiple products and is very consistently growing then first, you would expect to get a higher multiple, but you would also expect to get more cash up front and less of a performance structure.

This is no reason why I bought it. Simple form and structure for such an established business. Whereas if you just have one product, one platform that’s generally going to be high risk. So, buyers are going to want to kind of adjust for that. So, you generally expect to get anywhere between like I said 50 to 80% upfront cash deals do happen and that really depends on your business and the different kind of factors and reliance’s that go into it.

Steve: How long should someone expect this entire process to take?

Thomas: So depends a little bit on the size of the deal say as a general rule of thumb if you have and we’ll use this use three different levels of business and Million Dollar business $100,000 business and a 10 million dollar business. If you have a hundred thousand-dollar business you’d usually expect to sell within a month together.

Steve: Really? Wow. Okay.

Thomas: Million Dollar business generally two months than 10-million-dollar business generally three months. It can take longer than that, it can take less time than that. That’s a reasonable average to expect and then if you hire an M&A firm like us with an average success rate of 94.1% So the vast majority of deals, we take on will close part of the reason. I think you were surprised that the speed of smaller deals at that level firstly there are a lot of buyers. There’s a lot of demand businesses of that size at generally simpler. And also, they’re just less complex that it’s less often like Judeans. It’s required because there’s going to be less transactions less complexity and the financials probably less products. The contracts for sale itself is going to be quite simple. There’s not going to be a huge number of contingencies and that’s gonna be hey, I’m buying a business at that. Well, it’s probably going to be all cash to be $100,000 cash. We’re going to close in a week.

You’re going to send me $10,000 worth of Entry. It’s not going to be particularly complex as deals get bigger part of the reason, they take more time. Is there more complex and they have more moving parts. So, you just expect accountants’ lawyers will the different third parties to take more time at that level.

Steve: Does that 15% fee? Like are they using your lawyers and your accountants or is that all separate also?

Thomas: So, we cannot legally advise you throughout the process, but we can we will draft documents on your behalf. So, a lot of people at the lower end will choose to effectively represent themselves if they’re comfortable with contracts. So, we will prepare the sale agreement for example, but will again depend on the complexity deal get depending on how comfortable you are legalized you would then maybe bring in your own attorney, but essentially our fees are separate. So, if you are bringing in your accountant or attorney or lawyer beyond what we’re providing in our service then you would pay for that separately. But say most people do not do that until the deal gets larger and more complex to the stage where they probably already have both of those kind of professionals on retainer already
Steve: Right. Cool. Well Thomas we’ve been chatting for quite a while and I think we got through a pretty good overview of the process and I really appreciate it.

Thomas: Yeah. Well, thanks for having me.

Steve: If anyone is interested in buying or selling a business, where can they find you?

Thomas: Yes, the best thing to do is go to the F International website on there. We have a bunch of content about valuing businesses. For example, like we’ve I know we’ve gone through a bunch of stuff but there’s so many different variables that go into evaluation. It’s worth going on our blog reading through some of the content. We have various eBooks and like short courses you can go through that will teach you about the different things that we’ve spoken about today. If you’re interested in buying a business you can inquire on the different business. We have a sale going on. Sell a business get free evaluation. You can go there as well and we’ve spoken quite a bit about social media today.

But our team were pretty active on social media so you can always follow us on your preferred platform or platforms all of us that easy to get a hold of if you have any questions reach out for those of you who don’t really know where you want to get to or where you’re at right now. Feel free to reach out why he’s happy to have a chat. You don’t have to. Calling us as not a commitment to hire us or anything like that. So, we always like to chat.

Steve: And there’s no fee for buying a business, right? It’s only on the sell side.

Thomas: No, we do have a small admin fee throughout the process, but effectually no fee.

Steve: Okay. Well Thomas so really appreciate your time.

Thomas: Yeah. Thanks, Steve.

Steve: Thanks.

Steve: Hope you enjoyed that episode now eventually every business owner will want to sell their company and it’s important to understand where to focus your efforts when the time comes for more information about this episode go to mywifequitherjob.com/episode280.

And once again, I want to thank Klaviyo for sponsoring this episode, Kaviyo is my email marketing platform of choice for e-commerce Merchants. You can easily put together automated flows like an abandoned cart sequence a post purchase flow or win back campaign. Basically, all these sequences that will make you money on autopilot. So head on over to mywifequitherjob.com/klaviyo. Once again, That’s mywifequitherjob.com/klaviyo.

And I also want to thank Privy for sponsoring this episode. Privy is the email capture provider that I personally use the term visitors into email subscribers. They offer email capture exit intent and site targeting tools to make it super simple as well. And I like Privy because it is so powerful and you can basically trigger custom pop-ups for any parameter that is closely tied your eCommerce store. Now, if you want to give it a try it is free so head on over to privy.com/steve. Once again, that’s P-R-I-V-Y.com/steve.

Now I talked about how I use these tools in my blog and if you’re interested in starting your own e-commerce store heading over to mywifequitherjob.com and sign up for my free six day mini-course just type in your email and I’ll send you the course right away. Thanks for listening.

Outro: Thanks for listening to the My Wife Quit Her Job Podcast where we are giving the courage people need to start their own online business. For more information visit Steve’s blog at www.mywifequitherjob.com

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